Buying an existing business: How to identify the future potential for the business? PART 3
What are the potential opportunities to reduce expenses? Companies look for ways to reduce costs through advanced technology, better management software, reducing inventory, more efficient ways of collecting receivables.
Particularly most companies can take advantage of technology and software to reduce labour and operation costs; after all, the company must be competitive to survive the competitive market.
You should look into the business operation; has there been any equipment, vehicles, software updates. Considering the type of business, you should consider if there is an opportunity to introduce a new system to reduce the expenses. You may find out that such updates have to be so extensive that it is better to forget about it.
What is the customer base of the company? Here I like to mainly focus on the number of customers and the purchase volume for each customer. Many businesses get excited when they land a big customer with a proportionally large volume of purchase. A big customer is good to have if you have a pool of small and big customers. Let’s say the company has four big customers, with 70% of the total volume of sales. Losing one or more of these big customers will mean losing a large portion of sales. Another downside is your company will be a hostage to these big players, dictating the price and terms of the sale.
These big customers are regularly approached by competitions offering them more competitive terms. You may be forced to match the competition terms or risk losing the customer. So you need to review the company customer base, and ideally, you want a range of customers small, medium, big - no one customer having more than 20% of the total sales.
Is the space adequate for future operation and expansions? What are the lease’s terms and conditions? Keep in mind that by purchasing the company, you are bound by the lease and its terms. A real estate lawyer should review the lease terms and conditions; you may find the terms unacceptable. For example, you may have only a few years left of the lease, and the landlord may refuse to have the option of renewing the lease. In that case, you may renegotiate the lease with the landlord; otherwise, you may have to walkway from the deal.
Considering your plans for the business, you need to see if there will be enough space for the changes you have in mind. In that case, if moving the company to a new location is not feasible, perhaps it is not the company you should consider buying.
In summary, it is crucial to have an accountant, a lawyer, and a broker to help you along the way to purchase a business. Make a list of what is important to you and your goals. Pay close attention to the number; numbers don’t lie. Although difficult to notice and measure, a company’s reputation can be an asset or major issue in the future. There are always hidden opportunities that the seller may not have noticed; identifying them can be lucrative.
The above Real Estate article was provided by David Khosravi, a leader in his field in North York, Willowdale Real Estate, Reach out to David via email: firstname.lastname@example.org or by phone: 416.990.2424
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